What Do Silver:Gold & Platinum:Gold Ratios Tell Us?

We at Sunshine Profits are deeply convinced that the bullish fundamentals for the precious metals market are still in place, and are not easily put off by recent corrections. But how to tell which asset will outperform the others when the market finally starts to rally strongly? You might have noticed that we quite often use various ratios on our charts – such a technique is called Relative Strength Analysis and helps an analyst tell which of the two assets (or group of assets) is likely to do better in the future. This may be done to compare two particular assets (such as silver:gold ratio) or two groups of assets (such as the general stock market and precious metals stocks – SPX:GDX ratio).

In this essay, we will focus on the three most important precious metals: gold, silver and platinum and will try to apply the above-mentioned technical tool to predict which one of these may bring the highest profits in the near future. It is important, however, to bear in mind that even if one finds the asset that is likely to outperform the others in the same class of assets (such as a particular metal in the precious metals sector, or a particular mining stock among gold and silver stocks) it is still a very good idea to diversify and include also other assets from the same group in your portfolio. The thing is that finding the most likely outperformer(s) helps us set the right proportions for our portfolio but diversification is insurance in case we make a mistake or an unlikely event able to thwart our plans occurs.

With the above in mind, let us jump into the technical part of today’s essay – we’ll begin with gold’s long term chart (charts courtesy by http://stockcharts.com.)

We see that prices have moved above the 60-week moving average. The bottom appears to have formed at the level of the April 2012 low. An ABC zigzag correction pattern is in place now and is similar to what was seen at the beginning of 2009 and also in late 2009-2010 (and on multiple other occasions). It seems quite likely at this time that gold’s correction has completed.

That’s not a new information, but it’s worth repeating as it’s so important – gold has been correcting for about 1.5 year now, which makes one of the longest or the longest (depending on the exact definition) consolidation since the beginning of this bull market. Consolidations are necessary to cool down the optimism and shake “weak hands” out of the market. With analysts and banks lowering their gold price targets for the coming years, it seems that the “necessary sentiment damage” has already been done and that gold can now continue its upward path – in tune with its fundamental factors.